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Bank of England Forecasts Fragile Economy
The governor of the Bank of England has told MPs that the British economy is being more greatly affected than was previously thought.
Appearing before the Treasury Select Committee, Mervyn King also said that another interest rate cut was likely soon. This would help those trying to clear debt and make their monthly repayments.
Mr King said that the Bank would pour extra cash into the money markets in a bid to bolster confidence in the British financial system.
The Bank has already placed an extra £5 billion into the market and met with leading bank bosses, but he told MPs, "Across the world, confidence in financial markets is fragile."
Mr King said that it was becoming harder for financial institutions to receive funding against their assets, adding: "The heart of the problem is not in the real economy. It is in the financial sector itself."
This has meant that it has become far more difficult to get cheap secured loans or credit from banking institutions.
He revealed that the Bank's Monetary Policy Committee could cut interest rates when it next meets in order to boost economic growth but warned that tough inflation targets meant that it had a "difficult balancing act" on its hands.
Mr King warned that residential and commercial property was experiencing a reduction in both prices and business activity, "in part from the continued tightening of credit conditions reflecting the turmoil in financial markets."
However, he also had some good news for the committee. He said that house prices would be "broadly stable" over the next few years, and houses would eventually become more affordable for first-time buyers.
Mr King went on to tell MPs that inflation was likely to rise to about 3 per cent in the short term, due to ever-rising oil and food costs, plus soaring household utility bills, and the weaker pound.
Nevertheless, he expressed hope that it would return to around 2 per cent - the government's target figure – in, "the next couple of years."
Loan News posted on 04 April 2008
